This broad definition can cover a wide range of investments, from providing growth capital for insurance businesses in developing countries to investing in a chain of gyms in disadvantaged parts of the UK.

This investment approach acknowledges that philanthropy alone will not raise enough funding, as once the donor capital is spent, more has to be raised. In contrast, impact investing leverages on the power of global financial markets to raise capital for projects, often start-up businesses, with the purpose of generating measureable social or environmental benefits.

Whereas in the past there was a strong contrast between traditional investments looking to achieve a financial return and philanthropy, aimed at generating a social return, impact investing seeks to bridge that gap. Though an increasing number of investors are attracted by this new asset class,the sector is still facing some challenges before it can scale up, such as moving from the margins to the mainstream, and making funds appealing to a wider audience.

Currently, a majority of vehicles available to investors in this space are private equity or real asset funds. The Global Impact Investing Network, a not-for-profit organisation that works to promote and accelerate the industry, maintains a database of existing Impact Investing funds that totals approximately 350 investment products. A large part are rather small funds (less than US$50m), fairly illiquid and sometimes use specific legal structures unfamiliar to mainstream private or institutional investors.

These are some of the reasons which explain why private debt funds are seeing increasing inflows. Despite being lower in number, they are often more liquid, have a bigger absorption capacity and a lower risk profile. Liquidity in itself has certainly proven to be the number one stumbling block when it comes to attracting mainstream investors, and not just self-declared impact investors. Unlike the latter, most mainstream investors would not feel comfortable investing in products where they can be locked in for as long as 10 years. If the impact industry wants scale, it is therefore essential that it comes up with fairly liquid products. Interesting debt products are mainly found in microfinance or in the agriculture segment, where farmers’ cooperatives in emerging markets need debt to achieve their social mission, for example.

More recently, social impact bonds (SIBs) have gained momentum as they were designed to open up to private investors. Even if very promising, social impact bonds are still only an experiment, however.When exploring the design of certain social impact bond projects, the main challenge is that most of the approximately 25 bonds in the world are still at the pilot phase, so it is difficult to assess how successful they will be.

The most advanced project, centred on the Peterborough prison in the UK, looks to reduce reoffending. The promoters of the bond issued an encouraging ‘mid-term’ report a few months ago with some ‘preliminary results and lessons’ but it is difficult to draw any definitive conclusions at this stage. Another example in London is a SIB that pays for trusted adult “navigators” to help move homeless people into settled accommodation, increase employment levels and reduce the use of accident and emergency services. Investors receive a return of 6.5 per cent a year, paid quarterly, which is similar to the return investors would get with mainstream bonds.

These solutions can only work when issues are clearly measurable and performance indicators, which measure how successful the programme has been from a social point of view, are indisputable. For example, recidivism has a clear, scientific cost for society. But these programmes can take several years before they come to an end, and before it is possible to assess whether they have been successful.

Yet there are two innovations that are particularly interesting about social impact bonds: first, their capacity to mobilise private capital to finance social projects and second, the notion of “payments for results”; for the first time with this mechanism, investors get a direct correlation between social impact and financial performance. In the case of the prison project, if successful, the UK government will pay initial investors their capital and a coupon that increases in line with the success of the project.

Beyond liquidity and absorption capacity, another key to reaching a broader audience of private investors and ultimately enable the sector to go mainstream is to offer a product with similar financial returns to mainstream investments, with the social aspect being an additional consideration.

It is also crucial to be able to demonstrate that the promise of social impact has been delivered. Although the industry has made huge progress over the last few years in terms of impact measurement and standardisation, we are still at the beginning of the process and lack efficient and universal tools to assess the heterogeneous impacts these investments are producing.

Despite all the challenges, the growth trend in impact investing is set to continue. In the last couple of years, the interest for such products has increased and more successfully it has reached clients who were not experienced impact investors.

Bertrand Gacon is head of impact investing and socially responsible investing at Lombard Odier

Social Impact Bond Review

Resource for those interested in Pay for Success finance. The site maintains up-to-date news and media mentions, a 'Practitioner's Toolkit', general resources, PFS activity trackers, and other information.

Subscribe

A weekly newsletter that recaps Pay for Success, Social Impact Bond, and other relevant news.